PBF Energy Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 1, 2019. Financial statements are unaudited. PBF Energy consolidates PBF LLC and PBFX; figures below are generally PBF Energy consolidated unless otherwise stated. Dollar amounts are in millions except per-share and per-barrel figures.
Business context
PBF operates five U.S. refineries with combined processing capacity of approximately 900,000 barrels per day, plus a logistics segment through publicly traded PBFX. Refining results depend heavily on commodity prices, crude differentials, refinery utilization and operating costs.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $6,560.0 | $7,444.1 | $11,776.2 | $13,246.9 |
| Operating income | $9.5 | $422.3 | $374.1 | $518.0 |
| Net income (loss) | $(21.6) | $287.7 | $219.8 | $329.5 |
| Net income (loss) attributable to PBF Energy stockholders | $(32.2) | $272.1 | $197.0 | $302.5 |
| Diluted EPS | $(0.27) | $2.37 | $1.63 | $2.66 |
| Consolidated gross margin | $66.8 | $484.2 | $491.8 | $645.5 |
Q2 throughput averaged 854,100 barrels per day, versus 866,600 a year earlier. Reported gross refining margin was $526.5 million, or $6.76 per throughput barrel; excluding the inventory valuation item, it was $708.5 million, or $9.10 per barrel, versus $770.3 million, or $9.77, in Q2 2018. These excluding-item figures are non-GAAP measures.
For the first half, gross refining margin excluding the inventory item was $1,135.0 million, or $7.85 per barrel, compared with $1,292.6 million, or $8.57, in 2018. Refinery operating expense was $5.27 per throughput barrel in Q2 and $5.97 for the first half, up from $5.11 and $5.40, respectively.
Cash flow, liquidity and debt
- First-half operating cash flow was a use of $27.4 million, compared with cash provided of $307.9 million in 2018. Investing cash use was $501.9 million, including $206.1 million of property, plant and equipment expenditures and $261.9 million of turnaround costs.
- Cash declined to $204.1 million at June 30 from $597.3 million at year-end 2018. Working capital was $1,201.2 million, compared with $1,102.4 million at year-end.
- Reported current and long-term debt totaled approximately $2.03 billion, excluding separately presented lease liabilities. The debt table also reports $251.0 million drawn under the PBFX revolving facility. The PBF Holding revolving facility had no outstanding borrowings at quarter-end.
- Management reported total liquidity of approximately $1.80 billion, including cash and excess availability under the PBF Holding facility. PBFX separately had $244.9 million of available borrowing capacity. The company said it was in compliance with debt covenants.
- Dividends paid in the first half were $0.30 per share in each quarter. The board declared another $0.30-per-share dividend payable August 30, 2019.
Material changes and unusual items
- Q2 results included a non-cash $182.0 million pretax lower-of-cost-or-market (LCM) inventory charge, compared with a $158.0 million benefit in Q2 2018. For the first half, the LCM adjustment was a $324.0 million benefit, versus a $245.7 million benefit in 2018. These swings materially affected reported earnings and margins.
- Management attributed underlying performance pressure to unfavorable crude differentials and lower throughput and sales volumes, including planned refinery turnarounds and unplanned first-quarter downtime at Delaware City. Turnarounds at Paulsboro and Delaware City were completed in Q2; first-half turnarounds also affected Torrance.
- Q2 refining margins were stronger in the Mid-Continent and West Coast, but weaker East Coast conditions and compressed light-heavy crude differentials weighed on results. Renewable Fuel Standard compliance costs were $30.9 million in Q2 and $60.4 million in the first half, both below comparable 2018 periods.
- Operating costs rose, primarily due to turnaround and maintenance services; depreciation and amortization also increased with the larger asset base and turnaround activity. G&A declined, mainly due to lower employee-related and incentive compensation costs.
- Adoption of lease accounting guidance in January 2019 added approximately $250 million of right-of-use assets and lease liabilities at adoption, with no opening retained-earnings impact.
Outlook, transactions and risks
- Management expected 2019 net capital expenditures of $625–675 million, excluding PBFX and the pending Martinez acquisition; PBFX expected $30–35 million. The filing states most of the company’s planned turnaround spending was incurred in the first half.
- PBF expected to close its acquisition of Shell’s Martinez refinery and related logistics assets in Q4 2019, subject to customary conditions and approvals. The cash purchase price was expected to range from $900 million to $1.0 billion, plus inventory and working capital; financing was expected to combine cash and debt. Potential post-closing earn-out payments and integration or liability risks also apply.
- Management stated that available cash and capital resources were expected to cover operating needs, capital expenditures, dividends, debt service, Tax Receivable Agreement payments and the pending acquisition for the next 12 months. This outlook depends on operating cash generation and volatile market conditions.
- The company’s J. Aron inventory intermediation agreements were amended and extended; the Delaware City agreement ran to February 2020, with a possible mutual extension to February 2021. Termination could increase liquidity needs because PBF may have to finance inventory and repurchase specified products.
- Environmental and legal matters include ongoing refinery compliance proceedings, remediation obligations, and litigation. The filing reports $139.2 million of accrued environmental liabilities at June 30. A Chalmette mass-action case has an October 2019 mini-trial; the ultimate claim amount is not determinable. Management said certain other matters were not expected to have a material impact, while noting outcomes can be uncertain.
- Other key risks include commodity and crack-spread volatility, RIN and greenhouse-gas compliance costs, supply and logistics disruptions, counterparty exposure, floating-rate debt, and the possibility that the Martinez transaction is delayed or does not close. The filing provides no full-year earnings or margin guidance.
Most important facts for investors to verify
- How refinery margins, crude differentials and throughput performed after the Q2 turnaround work, separating operating trends from LCM accounting effects.
- Cash generation, working-capital needs and borrowing availability, particularly ahead of the Martinez acquisition and planned capital spending.
- Martinez closing conditions, final purchase price and working-capital amount, financing terms, and any earn-out obligations.
- Availability and renewal terms of the J. Aron inventory arrangements, and the liquidity impact if they are not extended.
- Updates on environmental liabilities, refinery compliance actions and material litigation developments.